NIGERIA: Anchoring Monetary Policy on Developmental Banking

Obinna Chima writes that the new focus of the Central Bank of Nigeria on developmental banking will impact positively on the economy

The new Central Bank of Nigeria (CBN) Governor, Mr. Godwin Emefiele, last week made public his policy thrust for the central bank.

Emefiele, in his 17-page vision statement, among other things, highlighted the fact that he wants to drive a central bank that is focused on developmental banking, aimed at cutting unemployment and raising Nigerians out of poverty.

Indeed, the relationship between the financial system and development globally remains very critical for any economy to realise its potential. Financial system development depends largely on the flow of funds from the banking system.

The banking system plays the important role of promoting economic growth and development through the process of financial intermediation.

Many economists have acknowledged that the financial system, with banks as its major component, ought to provide linkages for the different sectors of the economy.

They also averred that the system should encourage high level of specialisation, expertise, economies of scale and a conducive environment for the implementation of various economic policies of government intended to achieve non-inflationary growth, exchange rate stability, balance of payments equilibrium and high levels of employment.

Well-functioning financial systems are able to mobilise household savings, allocate resources efficiently, diversify risk, and enhance the flow of liquidity, reduce information asymmetry and transaction cost and provides an alternative to raising funds through individual savings and retained earnings.

Of course, banks play central role in the development of economies by mobilising resources for productive investments, for the effective implementation of monetary policy.

Nigeria has witnessed impressive gross domestic product growth over the past seven years. Yet, there seems to be an absence of a corresponding reduction in the unemployment rate in Nigeria, which had risen to 23.9 per cent in 2012 relative to 13.9 per cent in 2000.

Particularly worrisome is the rate of youth unemployment, which is too high.

Creating a people-centred CBN According to Emefiele, price stability can rarely be adjudged a goal in itself except cast against the ultimate objective of improvement in the quality of life.

While he noted that price stability remains a cardinal contribution and a cornerstone to the ultimate goal of economic development, he pointed out that reasonably stable prices provide a catalyst for rational consumption and investment decisions and for orderly economic progress.

Therefore, in order to realise the CBN’s vision, he stressed the need to begin to champion policies that promote the sustainability of macroeconomic stability.

But these are not expected to be achieved in the short-term. Some of the central bank’s developmental functions, according to the governor would include credit allocation and direct interventions in key sectors of the economy such as power, agriculture, micro, small and medium scale enterprises, oil and gas and health.

“We shall pursue a gradual reduction in interest rates. A comparison of selected macroeconomic aggregates from some emerging market countries including South Africa, Brazil, India, China, Turkey, and Malaysia indicate that Nigeria has one of the highest treasury bills rates.

“Such high rates create a perverse incentive for commercial banks to simply buy virtually risk-free government bonds rather than lend to the real sector.

“To enhance financial access and reduced borrower cost of credit, we would pursue policies targeted at making Nigeria’s treasury bills rates more comparable with other emerging markets and by extension, pursue a reduction in both deposit and lending rates,” he explained.

According to Emefiele, the central bank would also begin to include unemployment rate as one of the key variables considered for its monetary policy decisions.

He added: “With an annual addition of 1.8 million Nigerians to the labour pool, the central bank cannot afford to sit idly by and concentrate only on price and monetary stability.

“The core principle here is that the CBN will act as a financial catalyst by targeting predetermined sectors that can create jobs on a mass scale and significantly reduce our import bills.”

Strengthening monetary, fiscal policy relationship To the Head of Research, Sterling Capital Limited, Mr. Sewa Wusu, there is need for greater collaboration between monetary and fiscal policy for the central bank governor to achieve his target.

He noted the shift towards real sector growth and employment creation, which he said is good for the growth of the economy.

However, Wusu pointed out that apart from the mandate of the central bank, “the fiscal aspect of the economy is more or less responsible for growth in terms of the availability of funds to create employment.”

He added: “One thing that is very key is the fact that he said he is going to include unemployment rate into monetary policy formulation just as we have in the United States.

“This is a good initiative that would support monetary policy decisions so that they will know how to create the desired credit in the economy to stimulate growth.”

He argued that the CBN governor’s plan to reduce yield on treasury bills would be a “tall order” because there are many things that induces yields on the fixed income instrument.

Wusu noted that the Nigerian economy is peculiar in the sense that government borrowing still crowds out the private sector.

“Employment creation is like the lagging indicator, all other monetary variables such as interest rates, exchange rates, are the leading indicator. So as you are trying to put the leading indicator in normal perspective, the effective would produce employment creation through the policy thrust,” he added.

On his part, the Head of Investment Research at Afrinvest Securities Limited, Mr. Ayodeji Ebo noted that development of the economy is the sole responsibility of the government.

He however stated that in view of the high unemployment, for the central bank to serve as a catalyst to cushion the effect of the situation on the economy is a welcome development.

However, he advised the central bank to take measures in curtailing artificial demand for the United States dollar at the forex market.

“In view of the 2015 election, we feel they should try and extend the cashless policy to the forex market such that it would reduce the artificial demand we have been seeing.

“There should be a limit on the cash-dollar transaction that can be done.

That would help reduce the pressure from artificial dollar,” Ebo added. The National President, Renaissance Shareholders Association of Nigeria, Mr. Olufemi Timothy expressed optimism that with his performance at Zenith Bank, Emefiele would likely deliver.

But he advised the central bank to ensure that it works closely with the ministry of finance to stimulate the growth of the economy.

Also, the Chief Executive Officer, Economic Associates Limited, Mr. Ayo Teriba advised Emefiele to be careful not to repeat the Soludo-era errors of misinterpreting global cyclical surges in commodity prices and liquidity as indication of the success of domestic policy reforms, adding that he should not allow banks to get too exposed to commodity price and stock price ‘bubbles’.

“While economic realities rarely warrant bans on risky but legitimate activities, Emefiele should seek to find the optimal size of margin lending and ways of insuring the lenders against the likelihood of an eventual cyclical contraction in the market,” he added.

Clearly, what is paramount at this time is the stimulation of the economy, which is the norm globally.

Affordable and longtime finance may not be a sufficient condition for economic growth, but it is a necessary condition.

Consequently, all policy tools – monetary and fiscal should be deployed to stimulate the economy. Low inflation and robust reserves are good, but they should not be seen as ends in themselves, but means to an end.

The ultimate objective as the CBN governor has indicated should be to strengthen the economy and improve the welfare of its citizenry.

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